Nov. 11 (Bloomberg) -- To China, the world’s biggest energy
consumer, another Saudi Arabia of oil may lie beneath the ocean
to its south. Escalating regional tensions mean large-scale
drilling may be slipping further into the future.

The South China Sea may hold 213 billion barrels of oil, or
80 percent of Saudi Arabia’s reserves, according to Chinese
studies cited in 2008 by the U.S. Energy Information Agency. The
world’s second-largest economy claims “indisputable
sovereignty” over most of the sea, including blocks off Vietnam
that Exxon Mobil Corp. and Russia’s Gazprom OAO are exploring.

Disputes have strained China’s ties with its neighbors and
tensions rose this year as Vietnam said oil survey boats were
harassed by Chinese vessels. The friction threatens maritime
security in one of the world’s busiest shipping lanes and may be
discussed at a two-day summit of Asia-Pacific leaders hosted by
U.S. President Barack Obama in Honolulu starting tomorrow.

“China is the elephant in the room at the moment, so like
it or not, you cannot ignore it,” said Lin Boqiang, director of
the independent China Center for Energy Economics Research at
Xiamen University in Fujian province. “Countries at the rim of
the South China Sea are under pressure to find a practical way
to deal with its presence -- not to anger or challenge it.”

The sea lies south of mainland China at the western extreme
of the Pacific Ocean, and while it borders several nations China
claims a huge expanse. That’s based largely on a historical map
that predates the founding of the People’s Republic in 1949.
There are hundreds of islands, many disputed.

China-Vietnam Clash

Chinese and Vietnamese military forces clashed in the
Paracel Islands in 1974 and the Spratly Islands in 1988. The
region, marked by China’s “nine-dotted line” to delineate its
territorial claims, extends hundreds of miles south from its
Hainan Island to equatorial waters off the coast of Borneo, and
overlaps with areas claimed by Brunei, Malaysia and Taiwan.

The Philippines will propose a new initiative to settle
disputes in the South China Sea at a meeting of the Association
of Southeast Asian Nations next week, Foreign Affairs Secretary
Albert del Rosario said Oct. 26. President Benigno Aquino will
also meet with U.S. Secretary of State Hillary Clinton in Manila
this month and discuss maritime security with Obama at the East
Asia summit in Bali on Nov. 18, del Rosario said Nov. 9.

The U.S. set off China’s ire in 2010 when Clinton, speaking
at a regional summit in Hanoi, called resolving the competing
claims to the sea “a leading diplomatic priority.” That drew a
rebuke from Chinese Foreign Minister Yang Jiechi, who said
internationalizing the incident with U.S. involvement “can only
make matters worse and more difficult to solve.”

Security Alliances

“There are challenges facing the Asia-Pacific that demand
America’s leadership, from ensuring freedom of navigation in the
South China Sea to countering North Korea’s provocations and
proliferation activities to promoting balanced and inclusive
economic growth,” Clinton said in Honolulu yesterday.

The U.S. has longstanding security alliances with countries
including Australia, Japan, South Korea, and the Philippines,
which it aims to enhance, and faces a balancing act as it seeks
to deepen regional integration. Nations such as the Philippines
and Vietnam are simultaneously attracted by Chinese commerce and
concerned by what they consider Chinese belligerence. The U.S.,
likewise, sees China as both partner and rival.

Foreign Drillers

Vietnam and the Philippines reject China’s map as a basis
for joint development of oil and gas resources, and have pushed
forward oil and gas exploration projects in blocks which also
lie within areas claimed by China. In March, Chinese ships
chased away a vessel off the Philippines. Chinese vessels in
June rammed the cables of a survey ship doing work for Vietnam,
the second such incident in a month.

“Where we’ve seen these assertive -- verging on aggressive
-- actions from Chinese vessels of one stripe or another, the
common factor is a determination not to see the other countries
going ahead unilaterally to explore and produce oil or gas if
China is not involved,” said Euan Graham, senior fellow at the
S. Rajaratnam School of International Studies in Singapore.

Talisman Energy Inc., a partner of state-owned Vietnam Oil
& Gas Group, aims to begin drilling next year in a block that
China had already awarded to a U.S. rival and protected with
gunboats. Talisman’s blocks 133 and 134, about 300 kilometers
(186 miles) from Vietnam, are known as WAB-21 in China, which
awarded them in 1992 to Crestone Energy Corp. Crestone is now
owned by Houston-based Harvest Natural Resources Inc.

Exxon’s Discovery

Exxon, the world’s most valuable company, discovered oil
and gas in a field off Vietnam, the Wall Street Journal reported
Oct. 25. Companies including Malaysia’s Petroliam Nasional Bhd.,
Russia’s Gazprom, Paris-based Total SA and London-based Premier
Oil Plc have also found oil in the South China Sea, according to
the report.

China warned foreign energy companies against exploration
in the area after Exxon’s discovery, Hong Lei, spokesman of the
Chinese foreign ministry, said Oct. 31.

India’s state-run Oil & Natural Gas Corp. and PetroVietnam
signed Oct. 12 a three-year deal that aims to boost the
countries’ investment in exploration and production. On the same
day, D.K. Sarraf, managing director of unit ONGC Videsh Ltd.,
said the company may bid in an auction of nine offshore blocks
being offered by Vietnam that will close Jan. 26.

“China should denounce this agreement as illegal,” an
editorial published by the state-run People’s Daily said Oct. 14.
“Once India and Vietnam initiate their exploration, China can
send non-military forces to disturb their work, and cause
dispute or friction to halt the two countries’ exploration.”

Saudi Arabia

Chinese estimates of oil reserves cited by the U.S. energy
agency compare with 264.5 billion barrels of proven reserves
held by Saudi Arabia at the end of last year, data from the BP
Statistical Review of World Energy show.

The region may hold 2 quadrillion cubic feet of natural gas.
That’s more than five times the 350.8 trillion cubic feet of gas
held in North America, according to BP.

The Chinese numbers dwarf a 2010 United States Geological
Survey assessment of the entire Southeast Asia region which
calculated a mean undiscovered reserves estimate of 21.6 billion
barrels of oil and 299 trillion cubic feet of gas, including
onshore deposits.

“There are definitely oil and gas deposits in the South
China Sea, but there’s no confirmation how much until actual
drilling happens,” said Hooman Peimani, Principal Fellow at the
National University of Singapore’s Energy Institute. “It’s
essential for China to ensure it ends up with as large chunks of
assets as it can get in its vicinity.”

Chinese Consumption

China surpassed the U.S. as the world’s largest energy user
last year, using 2.4 billion tons of oil equivalent. Consumption
climbed 11.2 percent, the fastest among the world’s major
economies, according to BP.

Chinese companies have announced about $53 billion of bids
for overseas oil and gas assets since the beginning of last year
to meet the energy needs of the world’s most populous nation.

For Vietnam and the Philippines, the revenue and energy
security from offshore hydrocarbon reserves would help boost
economic growth. For China, delays to a final resolution of
territorial claims may prove more fruitful in the longer term.

“Time will only make China much stronger, both
economically and militarily, and increase its chances of
grabbing a bigger share of the pie,” Lin said. “We all know
when the elephant moves, it shakes the room.”